A Raison d’etre for Israel Bonds

When I made the decision to leave Israel’s private sector to serve as president and CEO of Israel Bonds, I came to an organization widely recognized – from ratings agencies to the Bank of Israel – as an important factor in building Israel’s economy.

Yet, despite this, I am sometimes asked about the continued need for the Bonds organization, given the strength of Israel’s economy. To me, this is a sign we need to do a better job of explaining our goals and achievements, which continue to be vital and necessary.

First, securities offered by the Bonds organization are gaining a new audience among U.S. investors. They are realizing that a financial vehicle established over 60 years ago to help build Israel is actually one of today’s most secure and prudent investments. Although not rated, Israel bonds are backed by the full faith and credit of the State of Israel. Israel’s economy is among the best in the developed world – historically low unemployment, a strong shekel, a positive trade balance and enthusiastic foreign investment. Israel’s 2011 budget deficit was just over 3.0 percent, with a growth rate of 4.8 percent – the envy of the developed world. While projections for 2012 are expected to be lower, they are still anticipated to be above the OECD predicted average for most developed nations.

Consequently, there has been a major uptick in interest from individual and institutional investors, as well as state and local governments. For example, Connecticut, Florida, Illinois, Indiana, Louisiana, Massachusetts, New York, Ohio, Oklahoma, Pennsylvania, South Carolina and Texas all purchased Israel bonds in 2011, and it is anticipated this trend will continue throughout 2012.

While investors in Israel bonds support a strong and secure Israel, make no mistake, they also purchase Israel bonds as an investment that makes good financial sense and are a significant means of meeting financial goals. During current tough economic times, when it is becoming increasingly difficult to find safe financial instruments that maintain capital and pay a competitive rate of return, Israel bonds are just the type of sound and safe investment for which they are looking.

Purchasers value that Israel has never defaulted on payment of principal or interest and Israel bonds deliver an attractive return. Interest rates for most Israel bonds are calculated at a spread over U.S. Treasury rates. While investors could also buy tradable Israeli government bonds, the mix of these two different vehicles is complementary and necessary, as additional choice is always advantageous. In addition, the fact that Israel bonds are non-tradable provides institutions with the security of capital preservation without the major market risks associated with tradable instruments.

Second, the large, diverse Israel Bonds client base is a significant, truly irreplaceable asset that even the largest financial services and technology companies would envy. For argument’s sake, were the State of Israel not to have access to this sizeable client base and then need to re-establish it, the cost of necessary interim credit lines from commercial banks would be quite substantial – and these credit lines might become unavailable in times of crisis.

For Israel to have the support of the Bonds organization – a secure and independent financial pipeline to draw on during tough times – is, without a doubt, a truly invaluable and scalable national resource. Israel Bonds clients have proven time and again that when Israel is the midst of a crisis, they do not walk away.

Third, the Israel Bonds organization is comprised of a professional team with a unique skill set. Similar to leading financial firms, Israel Bonds’ human capital is a valuable resource for the organization and a strengthened Israeli economy. Moreover, the lay leadership, through extensive networking and tireless voluntary advocacy, has facilitated many years of countless accomplishments for the organization.

The operational costs of the worldwide Israel Bonds organization – approximately three percent of bonds sold – compare favorably when measured against a theoretical attempt by Israel’s government to replicate the Bonds retail operation. Whether through its own efforts or via an independent brokerage firm, the government would incur significant expenses that would include not only the direct expenditure of the Israel Treasury’s capital-raising department domestically and abroad, but also underwriting fees paid to an investment bank, the costs of maintaining a large retail client base and the loss of the more favorable Israel Bonds rate differential.

Fourth, Israel bonds allow the retail client greater ease of access than the capital bond market, and can now be purchased online. A look at our internet presence clearly shows today’s Israel Bonds is not “your grandfather’s Israel Bonds”- it proactively utilizes new technologies and digital media to increase sales and promote a forward-looking investment message.

Indeed, it takes an organization with proven fundraising expertise and knowledge of the investment community to galvanize the support and capital to help build Israel’s infrastructure and assist with much-needed public works projects. And, make no mistake, Israel’s high-tech based economic success and stability, where brain power trumps the lack of natural resources, have been, and continue to be, supported by investments in Israel bonds.

Finally, Israel bonds are a heartfelt means of building a better Israel. There is an emotional element to this investment that cannot, and should not, be ignored. In fact, U.S. Senator Ben Cardin recently said Congress carefully watches the level of bond sales as a key indicator of American Jewish support for Israel and acts accordingly. It can also be assumed that Middle East regimes that consider themselves still in conflict with Israel, as well as those organizations that are boycotting Israel’s goods and services, understand that with the capital-raising capabilities of the Bonds organization, Israel remains not only militarily secure, but safe and sound on the economic front as well.

So does Israel really require a freestanding organization like Israel Bonds when its debt can be raised in the financial markets? The above facts unequivocally prove the answer is “yes.”

The Israel Bonds organization is not only offering an increasingly attractive and unique investment – in itself a far cry from the outdated misconception of Israel bonds as “charity” – but is also providing a raison d’être more compelling and relevant than ever.

Israel (Izzy) Tapoohi is the new president and CEO of Development Corporation for Israel/Israel Bonds